Pretrial Litigation New Rules Federal , Venue,

By Alison C. Finnegan and Removal and Jonathan M. Stern

Federal court practitioners need to understand the impact of recent legislation on their day-to-day practices.

Changes are afoot for attorneys practicing in the United States federal . Effective with all state and federal commenced on or after January 6, 2012, the Fed- eral Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63, makes changes U.S.C. §§1390–92, 1404, and removal, 28 to the federal statutory provisions on diver- U.S.C. §§1441, 1446, 1454. House of Repre- sity jurisdiction, 28 U.S.C. §1332, venue, 28 sentatives Report 112-10, submitted by the

■ Alison C. Finnegan is a partner of Schnader Harrison Segal & Lewis LLP in the firm’s Philadelphia office, where she is a member of the firm’s Litigation Department, Aviation Group, and Financial Services Group. She is admitted to the bar in Pennsylvania and New Jersey. Jonathan M. Stern is a partner of Schnader Har- rison Segal & Lewis LLP in the firm’s Washington, D.C., office, where he co-chairs the firm’s Aviation Group. A member of the District of Columbia, Maryland, Pennsylvania, and Virginia bars, he is a past chair of DRI’s Aerospace Law Committee.

8 ■ For The Defense ■ March 2012 © 2012 DRI. All rights reserved. U.S. House of Representatives Committee ment “curtailed alienage jurisdiction in one the concept of corporate citizenship… to on the Judiciary, which accompanied the setting” but “created an arguable basis for preclude over a dis- house bill, explains at length the purposes expansion of alienage jurisdiction in other pute between an in-state citizen and a cor- and effects of this legislation. This article settings.” H.R. Rep. No. 112-10, at 7 (2011). poration incorporated or primarily doing provides a synopsis of the key changes and Namely, two resident aliens domiciled in business in the same state.” H.R. Rep. No. the implications for day-to-day practice. different states each could be “deemed” a 112-10 at 8 (2011) (emphasis added). resident of the state of domicile thus claim- According to House Report No. 112-10, Resident Alien Treatment ing access to federal courts in violation of federal courts struggled to apply the for- for Diversity Purposes the rule in Hodgson v. Bowerbank. mer version of the statute in actions involv- The Federal Courts Jurisdiction and Venue The Act removes the resident alien pro- Clarification Act (the “Act”) changes the vision and the deeming language. Instead, treatment of resident aliens, meaning aliens section 101 of the Act, codified at §1332(a) “admitted to the United States for perma- (2), now creates an exception to diversity of The Act changes the nent residence,” for diversity jurisdiction citizenship jurisdiction and accomplishes purposes, effectively closing the federal “the goal of modestly restricting jurisdic- way that courts will courthouse doors to disputes between tion, which Congress sought to accom- aliens whether permanent residents or not. plish when it first enacted the resident treat corporations and According to House Report 112-10, these alien proviso” in 1988. H.R. Rep. No. 112- changes constitute a “modest[ ]” jurisdic- 10, at 7 (2011). The report further notes that insurance companies in tional restriction while leaving state courts “[s]tate court forums would remain avail- available to resolve disputes between such able to aliens if Federal court forums were direct actions in diversity parties. H.R. Rep. No. 112-10, at 7 (2011). foreclosed.” Id. Diversity jurisdiction exists when a mat- Notably, the Act adds this restriction jurisdiction cases. ter in controversy exceeds $75,000 and is only to section 1332(a)(2). Section 1332(a) between citizens of different states. The fed- (3) remains unchanged. Thus, citizens or eral courts have long required “complete subjects of a foreign state may continue ing United States corporations with foreign diversity” between the parties: no to appear as additional parties to disputes contacts or foreign corporations operat- and no can have citizenship in between citizens of different states. ing in the United States. H.R. Rep. No. the same state. Under the revisions to sec- 112-10, at 8 (2011). The difficulty appar- tion 1332(a)(2), federal district courts do Citizenship of Corporations ently stemmed from the word “State” in not have jurisdiction of an action “between and Insurance Companies §1332(c)(1). Did “State” mean a state within citizens of a State and citizens or subjects The Act, by broadening the deemed cit- the United States, or did it include a for- of a foreign state who are lawfully admit- izenship of corporations and, in direct eign state? Section 1332(e) defined “States” ted for permanent residence in the United actions, insurance companies, probably as including “the Territories, the District States and are domiciled in the same State.” will slightly reduce the frequency with of Columbia and the Commonwealth of Formerly, the federal courts did not have which these entities will appear before fed- Puerto Rico.” House Report No. 112-10 jurisdiction over a dispute that involved eral courts in diversity jurisdiction cases. noted that several courts had held that the only aliens. See H.R. Rep. No. 112-10, at 6 Section 102 of the Act changes the way word “States” applied only to the 50 states (2011) (“Alienage jurisdiction exceeds the that courts will treat corporations and and other places specified in the definition limits of Article III unless a citizen of the insurance companies in direct actions in because it began with a capital “S.” E.g., United States also appears as a party. See diversity jurisdiction cases under 28 U.S.C. Torres v. Southern Peru Copper Corp., 113 Hodgson v. Bowerbank, 9 U.S. (5 Cranch) §1332(c)(1). According to House Report No. F.3d 540, 543 (11th Cir. 1997); Cabalceta 303 (1809)). But the closing paragraph of 112-10, the “purpose [of the amendment v. Standard Fruit Co., 883 F.2d 1553, 1559 section 1332(a) formerly contained “deem- to that section] is to clarify how foreign (5th Cir. 1989). One federal district court ing” language specifying that “an alien contacts should affect the determination expressed the following reasoning: admitted to the United States for perma- of whether diversity of citizenship exists Throughout Chapter 85 of Title 28, nent residence shall be deemed a citizen when a case involving these entities is filed which are the sections of the law dealing of the State in which such alien is domi- in or removed to Federal court.” H.R. Rep. with the jurisdiction of district courts, ciled.” H.R. Rep. No. 112-10, at 6 (2011). No. 112-10, at 8 (2011). the term “foreign state” is used to refer This language, added in 1988 by the Judi- Formerly, when one of the parties to a to foreign states, but the word “State” is cial Improvements and Access to Justice civil action was a corporation, the corpo- used to refer to states within the United Act, Pub. L. No. 100-702, precluded federal ration was deemed a citizen of “any State” States. Additionally, section 1332(e) clar- jurisdiction in lawsuits between a citizen in which it had been incorporated and the ifies that “State” is referring to American of a state and an alien who permanently state in which it had its principal place of citizens by saying: “The word ‘States’ as resided in the same state. House Report business. Congress added these provisions used in this section includes the Ter- No. 112-10 recognizes that the 1988 amend- to 28 U.S.C. §1332(c)(1) in 1958 to “expand ritories, the District of Columbia, and

For The Defense ■ March 2012 ■ 9 Pretrial Litigation

the Commonwealth of Puerto Rico.” 28 by House Report No. 112-10, in a direct at 12 (2011). The Act does not explain what U.S.C. §1332(e). action case “the plaintiff sues the liability makes a state law matter “unrelated” to a Wu v. Ryder Truck Rental, Inc., 561 F. Supp. insurance company directly without nam- federal claim, so we assume that the juris- 2d 1061, 1063 (E.D. Mo. 2008) ing as a defendant the insured party whose prudence developed by the courts under the Other courts, however, held that the negligence or other wrongdoing gave rise previous version of the statute still stands. word “States” meant foreign states and the to the claim.” H.R. Rep. No. 112-10, at 10 See, e.g., Nesbitt v. Bun Basket, Inc., 780 F. states of the United States. E.g., Nike, Inc. (2011). Formerly, section 1332(c)(1) deemed Supp. 1151 (W.D. Mich. 1991) (remanding v. Comercial Iberica de Exclusivas Deporti- an insurer in such a a citizen of any to state court an employee’s contract claim vas, S.A., 20 F.3d 987 (9th Cir. 1994). This, state by which the insurer had been incor- against an employer but retaining the em- of course, conforms to the jurisdiction-­ porated and of the state in which it had its ployee’s Fair Labor Standards Act claim be- limiting purpose of the 1958 amendment. principal place of business. Now under sec- cause the contract claim was insufficiently In Nike, the Ninth Circuit declined to draw tion 1332(c)(1) in direct actions related to the statutory overtime claim, the a distinction between foreign and domestic against the insurer of a policy or contract two claims were not part of a single ongoing corporations when determining the corpo- of liability insurance, whether incorpo- wrong, and they did not arise from a com- rations’ citizenship for purposes of diver- rated or unincorporated, to which action mon nucleus of fact). sity jurisdiction, instead deeming each the insured is not a party defendant, a citizen of both its place of incorpora- the insurer shall be deemed a citizen of Removal Procedures Changes tion and its principal place of business. (A) every State and foreign state of which and Clarifications Id. at 990. Because Nike, the plaintiff, was the insured is a citizen; (B) every State Perhaps the most significant changes made incorporated in Bermuda and none of the and foreign state by which the insurer by the Federal Courts Jurisdiction and was a U.S. citizen, the Ninth has been incorporated; and (C) the State Venue Clarification Act have to do with Circuit held that the federal district court or foreign state where the insurer has its removal procedures. In particular, the Act lacked diversity jurisdiction. Id. at 991. principal place of business. clarifies removal timing and consent to Under the recently amended section removal. 1332(c)(1), the language “any State” has been Amended Section 1441(c)— The Act provides that each defendant abandoned in favor of “every State.” Thus, “Sever and Remand” shall have 30 days after service of the ini- courts will regard all foreign and domestic Amendments to 28 U.S.C. §1441(c) “clarify tial or summons to file a notice corporations as citizens of both their places the right of access to Federal court upon of removal. 28 U.S.C. §1446(b)(2)(A). Pre- of incorporation and their principal places removal for the adjudication of separate viously, the federal courts differently of business, which will eliminate diversity Federal law claims that are joined with approached removal timing in multi-­ jurisdiction when (1) a foreign corporation unrelated state law claims.” H.R. Rep. No. defendant cases: some courts held that with its principal place of business in a state 112-10, at 12 (2011). Formerly, this section the date of service on the last-served de- sues or is sued by a citizen of the same state, of the statute appeared to permit removal fendant activated the 30-day period while and (2) a citizen of a foreign country sues a of an entire case whenever a “separate and others held that the date of service on U.S. corporation with its principal place of independent” federal question claim was the first-served defendant activated the business abroad. H.R. Rep. No. 112-10, at 9 joined to one or more claims over which the 30-day period. Other courts adhered to (2011). House Report No. 112-10 notes that federal courts did not have original juris- what is the new statutory standard. House state courts of general jurisdiction remain diction. The federal district court would Report No. 112-10 lists several cases dem- available to parties blocked from the federal either retain the entire case or remand all onstrating these divergent approaches. See courts by the amendment. Id. The report matters in which state law predominated. H.R. Rep. No. 112-10, at 13–14 (2011). The further notes that this clarification brings H.R. Rep. No. 112-10, at 12 (2011). Accord- report notes that “[f]air­ness to later-­served 28 U.S.C. §1332(c)(1) in line with the defi- ing to House Report No. 112-10, “[s]ome defendants, whether they are brought in nition of corporate citizenship in the Mul- Federal district courts have declared the by the initial or an amended tiparty, Multiforum Jurisdiction Act provision unconstitutional or raised con- complaint, necessitates that they be given of 2002, Pub. L. No. 107-273, which deems a stitutional questions because… subsection their own opportunity to remove, even if corporation a “citizen of any State and a cit- 1441(c) purports to give courts authority to the earlier-­served defendants chose not izen or subject of any foreign state, in which decide state law claims for which the Fed- to remove initially.” H.R. Rep. No. 112-10, it is incorporated or has its principal place eral courts do not have original jurisdic- at 14 (2011). Moreover, now earlier-­served of business.” 28 U.S.C. §1369(c)(2). See also tion.” H.R. Rep. No. 112-10, at 12 (2011). defendants may join in and consent to Jonathan M. Stern, Terrible Twos or Doing The Federal Courts Jurisdiction and removal by a later-­served defendant even What It’s Supposed to Do? The Multiparty, Venue Clarification Act establishes a “sever-­ if the earlier-­served defendant did not pre- Multiforum Trial Jurisdiction Act, For The and-­remand” approach: a defendant can viously initiate or consent to removal. 28 Defense (May 2005). remove a case to a federal court to have a U.S.C. §1446(b)(2)(C). The same broadened definition of citi- federal forum resolve federal claims, but the Section 1446(c)(2), a completely new zenship applies to insurance company par- federal district court must remand unre- subsection, will allow a defendant to assert ties in direct action lawsuits. As described lated state law matters. H.R. Rep. No. 112-10, an amount in controversy in the removal

10 ■ For The Defense ■ March 2012 notice if a plaintiff’s initial pleading seeks tion” that distinguishes venue from other domiciled abroad, whether aliens or United non-­monetary relief or a money provisions of federal law that operate as States citizens, cannot raise a venue defense when the state practice either does not per- restrictions on subject-­matter jurisdiction. to the litigation location. H.R. Rep. No. 112- mit a plaintiff to demand a specific sum H.R. Rep. No. 112-10, at 17 (2011). 10, at 22 (2011) (emphasis added). Object- or permits a plaintiff to recover The Act also clarifies that, consistent ing to in the United in excess of the amount demanded. Sub- with current case law, the removal stat- States’ courts, however, remains available section 1446(c)(2) allows a defendant to ute—not the venue statute—governs the to aliens as well as to United States citizens use from the state court action proper venue for cases removed from state domiciled abroad. 28 U.S.C. §1391(c)(3). The to determine for removal purposes the to federal courts. See 28 U.S.C. §1390(c). amended statute further requires courts to amount in controversy. Information in the The Act also establishes a “unitary state court action record that shows a suf- approach” to venue requirements that ficient amount in controversy is deemed removes distinctions between federal ques- “other paper” under 28 U.S.C. §1446(b)(3), tion jurisdiction and diversity jurisdiction Courts will regard all starting the 30-day removal period anew. in section 1391, the “general venue statute.” Further, under the Act, when litigating par- H.R. Rep. No. 112-10, at 19 (2011). Specifi- foreign and domestic ties dispute the amount in controversy, the cally, 1391(b)(1) explains venue rules for trial judge must apply the preponderance of venue based on residency of the defend- corporations as citizens the evidence standard to his or her jurisdic- ants; section 1391(b)(2) explains venue tional fact finding. rules for venue based on where the events of both their places of Additionally, the amendment to section leading to an action took place; and section 1446(c)(3) lifts the one-year limitation on 1391(c) establishes a “fallback venue” when incorporation and their removal of diversity actions if a plaintiff there is no appropriate district in which an has “acted in bad faith” to prevent removal. action may otherwise be brought. The Act principal places of business. The federal district court has the discretion defines “fallback venue” as any judicial dis- to allow removal at any time if bad faith is trict in which any defendant is subject to found. We believe that this more than any personal jurisdiction in the action. disregard United States citizens who reside other aspect of the Act will lead to the most The Act amends 28 U.S.C. §1391(c) by de- abroad in determining the proper venue in litigation. House Report No. 112-10 impor- fining “residency” for all venue purposes in actions with multiple defendants. Id. Note, tantly notes that, if a plaintiff deliberately the United States Code. This subsection for- however, that permanent resident aliens fails to disclose the amount in controversy merly defined residency but only for pur- have a venue defense under section 1391(c) to prevent removal, that would constitute poses of venue under Chapter 87 and only (1), which treats them as “natural persons” bad faith. H.R. Rep. No. 112-10, at 16 (2011). as applied to corporations. The amended for residency purposes. See 28 U.S.C. §1446(c)(3)(B). version of section 1391(c) now defines res- Finally, the Act separates the provisions idency for natural persons, incorporated Changing Venue for removal of civil and criminal proceed- and unincorporated entities, and nonresi- The revisions to 28 U.S.C. §1404(a) will per- ings into two statutes, codifying the pro- dent defendants. 28 U.S.C. §1391(c). mit a federal district court to transfer a civil cess for removal of criminal proceedings in The Act now specifies that “residency” action to any district or division to which 28 U.S.C. §1454 and leaving the civil provi- for natural persons means “the judicial all parties have consented if convenient for sions in 28 U.S.C. §1446. district in which that person is domiciled.” the parties and witnesses and in the inter- 28 U.S.C. §1391(c)(1). According to House est of justice. This expands the authority of “Venue” and “Residency” Definitions Report No. 112-10, this amendment adopts 28 U.S.C. §1404, which previously allowed Section 201 of the Federal Courts Jurisdic- a rule followed by a majority of appellate transfer only to another district or division tion and Venue Clarification Act redefines courts; in lawsuits involving multiple de- in which a case might have been brought, the term “venue” as fendants not domiciled in the same state, meaning to a district proper in terms of a geographic specification of the appro- it requires courts to situate lawsuits for both venue and subject-­matter jurisdiction priate forum for litigation of a civil adjudication in claim-based venues. Aliens requirements. Section 1404(d), however, action that is within the subject-­matter lawfully admitted for permanent residence expressly prohibits transfers from Article jurisdiction of the district courts in gen- also are covered by section 1391(c)(1). III district courts to the district courts of eral and does not refer to any grant or The Act also clarifies the appropriate Guam, the Northern Mariana Islands, and restriction of subject-­matter jurisdiction venue for nonresident defendants. For- the Virgin Islands. 28 U.S.C. §1404(d). providing for a civil action to be adjudi- merly, a person could sue an alien de- Federal court practitioners will want cated only by the district court for a par- fendant under section 1391(d) in any to familiarize themselves with these new ticular district or districts. district, which meant that aliens could not rules before filing a new action or respond- 28 U.S.C. §1390(a). raise venue as a defense to the place of liti- ing to an action filed in state court. As men- House Report No. 112-10 characterizes gation. The Act focuses on defendants not“ tioned, they apply to actions filed after this change as providing a “general defini- resident in the United States,” so persons January 6, 2012.

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